The dark side of green credit: Evidence from listed firms in China.

After the enforcement of the green credit policy, do firms alleviate tightened external financing constraints by substituting toward alternative financing channels, or by engaging in green innovation to regain credit access? To address this question, we develop a theoretical framework that integrates heterogeneous financing channels into a Melitz-type model. The model demonstrates that the decline in green innovation is jointly driven by financing structure adjustments arising from the policy's price shock and the crowding-out of environmental investment caused by its quantity shock. Exploiting China's Green Credit Guidelines as a quasi-natural experiment, we find that the Guidelines significantly suppress corporate green innovation in China, and this effect is robust to multiple specifications. Mechanism tests confirm that firms respond primarily through financing substitution and reduced environmental investment. Our study highlights the innovation-related unintended consequences of the green credit policy and offers important insights into how credit-constrained and polluting firms respond in terms of strategic green innovation and financing behavior.